When finance directors for a couple of the nation’s largest dealership groups plus a leading consultant and trainer tell me that interest-rate markups are on the way out, I pay attention.
No, it might not be tomorrow, but maybe within a few years.
The dealers’ finance profit already has been whittled away by competition. In recent years, lenders also have been placing limits on how much dealers can mark up the buy-rate — some in response to class-action lawsuits. And now the markups are likely to face attack by regulators who view them as hidden fees.
Flat fees may replace the markup. Not the skimpy fees of many years ago but healthier ones calculated as a percentage of the amount financed. Credit unions led the way on this as more of them entered the indirect-lending business. Typically, they’ve paid dealers 1 percent of the amount financed.
Banks jumped in and started offering what’s called a “super flat,” paying 1 to 3 percent of the amount financed. This was partly a response to credit unions. I’m told it’s also in anticipation of regulation.
Many dealers already de-emphasize the finance profit in their pay plans and are rewarding F&I managers more on product sales. With the competitive and legal pressure ahead, look for more of the same.